Private Credit, a $500 Billion Market That Worries the Bank of Canada — BigGo Finance

OTTAWA — The Bank of Canada is closely monitoring the rise of an alternative lending model that exposes Canadian investors and banks to a loan volume reaching $500 billion, most of which remains out of public view. The concern centers on private credit, which lacks a universal definition but broadly refers to loans taken out by companies from non-bank lenders, including asset managers, insurers, and pension funds.

A mid-sized company may turn to private credit if it seeks funds to finance its next growth phase but is still too small to obtain a traditional bank loan or issue debt securities on the bond market. The share of Canadian companies using private credit remains limited, but the rapid adoption of this model globally and in the United States has been associated with high-profile bankruptcies.

A Model to Watch

Private credit was flagged as a risk in the 2026 Financial Stability Report published in May by the Bank of Canada. Central bank economists released a paper last week tracing the growth of this model in Canada and explaining to a broader audience why private credit warrants monitoring.

Globally, the use of private credit is expanding rapidly as companies seek fast and flexible ways to access capital, according to the Bank of Canada. But the report’s authors noted that the share of loans extended by non-bank institutions to domestic companies has held steady at roughly 15% over the past decade. This, they said, suggests that “private credit has not gained ground at the expense of traditional funding sources.”

The Bank of Canada’s analysis concluded that Canadian companies are not taking on these loans en masse. Earlier this year, the bank estimated that the total value of private loans extended by Canadian investors and loans made to private credit funds by Canadian banks stood at $500 billion. The bulk of this lending activity took place in the United States.

In Canada, private loans originate primarily from life insurers, pension funds, and asset managers. Contrary to what one might expect, banks themselves are also exposed to private credit by extending loans to funds active in this sector.

The Bank of Canada emphasized that insurers and pension funds represent stable investors in the private credit market. Domestic asset managers represent “a small but growing segment” of the market, while banks’ exposure to private credit is viewed as posing relatively low risk.

In its May financial stability report, the Bank of Canada deemed the risks associated with private credit “manageable,” but policymakers still consider it a sector worth watching. Since private credit has yet to be tested during a prolonged market downturn, the potential ripple effects on the financial system in the event of such a shock remain unknown.

“This exposure can contribute to portfolio diversification and support returns, but it also creates possible channels of contagion,” Bank of Canada economists wrote last week. “A sharp decline in private credit performance abroad could have repercussions for Canadian investors and business lending at home,” they added.

An Option That Isn’t New

Peter MacKenzie, senior policy analyst at the C.D. Howe Institute, explained that private credit established itself as an attractive option after the 2008-2009 financial crisis, when major banks pulled back from lending to small and medium-sized enterprises to focus on safer, more established companies. Private lenders stepped in to fill that void, according to MacKenzie.

Interest rates on private credit are generally higher, but companies may appreciate the speed at which non-bank lenders act and the relative flexibility of their terms. MacKenzie, however, highlighted a lack of transparency in private credit, where transactions are typically negotiated behind closed doors.

“The opacity and the absence of an explicit definition of what private credit is, which these various insurance companies, pension funds, and banks must disclose in their financial statements — that alone represents, in my view, a certain risk,” he said.

Bank of Canada analysts also expressed concerns about the complexity of structures and the lack of visibility surrounding private loans. The growth of private credit is occurring “largely outside a regulatory framework,” which represents an increased risk for investors and Canada’s financial stability, the central bank noted in its report. Private companies are also not subject to the same disclosure requirements as publicly traded banks, limiting visibility into the rigor of underwriting standards at some private lenders.

Recent Turbulence and Reactions

MacKenzie believes current concerns about private credit are tied to “stresses” in the United States. Last year’s bankruptcy of First Brands Group, a Texas-based auto parts manufacturer largely financed by private credit, was one of the most high-profile collapses that rattled the sector. Last spring, some major private credit funds capped investor withdrawals as fears about bad loans spread.

In Canada, turbulence has been particularly pronounced in private real estate funds. Here is an overview of companies that temporarily suspended or limited withdrawals from their funds over the past year:

Note: These measures were taken over the past year due to turbulence in Canadian private real estate funds.

In private credit, investor money is generally lent out. According to MacKenzie, this means withdrawals typically follow a stricter schedule than in the case of more liquid equity-focused funds, where assets can be bought and sold relatively easily.

Bruce Flatt, CEO of Canadian asset management firm Brookfield (BN), stated in a letter to shareholders last quarter that he had confidence in the company’s approach to the sector after completing the acquisition of Oaktree, a U.S.-based fund with a significant private credit business. Flatt described the recent turbulence as a “healthy adjustment” after a period when abundant capital in private credit had led to looser underwriting standards.

“We do not, however, view the current situation as a systemic problem, and the sectors drawing the most attention represent only a very small portion of the overall credit market,” Flatt wrote.

Potential Impact on the Financial System

Beyond stability concerns, MacKenzie noted that Canadian banks’ exposure to the private credit sector could lead to a broader tightening of financial conditions if funds began to see their loans deteriorate. In this hypothetical scenario, instead of lending to domestic companies, banks would divert that money to bailing out private credit funds.

But he also worries that panic over private credit in the United States could lead domestic regulators to crack down too hard on what has so far been a niche but stable source of capital for Canadian businesses.

“You could see this effect: we would start overregulating the Canadian market because of what’s happening in the United States, but then we would lose some of that Canadian business investment that we so desperately need,” he added.